Brent crude has climbed from around $60 a barrel at the start of the year to roughly $100, pushing UK inflation forecasts higher and sparking talk of fresh rate hikes. One of the people who actually sets those rates just told the market everyone is getting ahead of themselves.
Alan Taylor, a member of the Bank of England's nine-person rate-setting committee, said on Thursday the central bank can probably ride out this inflation shock without raising borrowing costs. In his words, "An extended hold would probably be enough restrictiveness to deal with the situation."
That is a noticeably different message from what fixed-income traders have been pricing in.
The Bank of England has held its base rate at 3.75% since cutting six times between August 2024 and December 2025. Taylor has sat on the dovish end of the committee, with his own estimate of the "neutral" rate, where policy is neither helping nor hurting the economy, sitting around 3%.
His logic is that the current rate is already squeezing the economy enough to absorb the energy shock. Oil at $100, a weaker pound, and a jump in gas prices have pushed Oxford Economics to lift its 2026 UK inflation forecast by about 0.4 points to roughly 2.7%, well above the 2% target.
Taylor sees the case for a hike only if oil camps out at $130 a barrel for months and starts pushing wages and prices with it.
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Rate-cut bets have collapsed since the war started, with traders now pricing in no UK cuts at all for the rest of 2026 and a return to a 4% base rate by June 2027. Some forecasters have gone further, modelling a path to 5.25% if energy prices stay sticky.
That is roughly the opposite of what Taylor is saying.
He is not alone on the dovish side. Deputy Governor Sarah Breeden said last week the Bank is in no rush to lift rates, while Catherine Mann is pushing the other way, worried firms have more pricing power than current models assume.
The Bank's next move is less about a single meeting and more about how long oil stays where it is. Where energy prices sit in three months, and where wage growth lands in the fall data, will tell investors which side of the committee is winning the argument inside the building.
For now, the market is leaning hawkish while one of the actual voters is leaning the other way. That gap is where the next move in UK gilts and the pound is going to come from.
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